Question

1. Evaluate the effects of IMF and the World Bank on international trade and their disadvantages. Treat them together as much as you can. Why do you think they are problematic?

Answer 1

The International Monetary Fund is all about avoiding and/or mitigating the effects of the two types of financial crises: monetary and debt. A secondary goal is to stop the "viral" nature of these crises from spreading to other economies. A monetary crisis is when a country's foreign reserves are depleted rapidly, usually due to net cash outflows via investors withdrawing their money from the economy. A debt crisis is when a country can no longer meet its short term debt obligations, subjecting it to higher and higher interest rates reflecting their riskiness. Typical causes: high net deficits (expenditures >> tax revenue), low GDP growth, high debt to GDP level. Both of these crises are linked to confidence in the country's economic prospects; and as such tend to spiral out of control as confidence dwindles. The IMF serves as the "lender of last resort" for nations facing these crises. It will provide cheap (low interest rate) debt for the country to meet its short term obligations, together with structural reforms meant to avoid history repeating itself.

The World Bank is all about alleviating poverty via economic development. They do this through cheap loan programs either to a nation's government itself (through its International Bank for Reconstruction and Redevelopment - IBRD) or to private companies looking to invest in developing economies (through its International Finance Corporation - IFC). They also provide insurance for companies that want to hedge their risks in emerging markets, including expropriation, nationalization, etc. This is done through yet another acronym, the Multilateral Investment Guarantee Agency (MIGA).

These two institutions were born at the same time along with what's now known as the World Trade Organization. Their respective economists likely work together on a regional basis. Also, since both require structural reforms as a part of their conditions to give loans, they likely align with each other on what they like to see structurally in a nation.

The International Monetary Fund promotes monetary cooperation internationally and offers advice and assistance to facilitate building and maintaining a country’s economy. The IMF also provides loans and helps countries develop policy programs that solve balance of payment problems if a country cannot obtain financing sufficient to meet its international obligations. The loans offered by the IMF, however, are loaded with conditions. Often, a loan provided by the IMF as a form of "rescue" for countries in serious debt ultimately only stabilizes international trade and eventually results in the country repaying the loan at rather hefty interest rates. For this reason, the IMF has many critics worldwide.
The World Bank's purpose is to aid long-term economic development and reduce poverty in developing countries. It accomplishes this by making technical and financial support available to countries. The bank initially focused on rebuilding infrastructure in Western Europe following World War II, and then turned its operational focus to developing countries. World Bank support helps countries reform inefficient economic sectors and implement specific projects, such as building health centers and schools or making clean water and electricity more widely available. World Bank assistance is typically long term, funded by countries that are members of the bank through the issuing of bonds. The World Bank also has a pool of about $200 billion with which to offer aid to less-developed countries. The bank’s loans, however, are not used as a type of bailout, as in IMF style, but as a fund for projects that help develop an underdeveloped or emerging market nation and make it more productive economically.